All Forum Posts by: Stuart Udis

Your post is entirely about the deal and offers very little about yourself. This leads me to believe your pitch to an investor closely parallels. Why can’t the equity partners you are recruiting simply buy this deal on their own and higher a management company? As the sponsor you have to be able to articulate to LP's your competitive edge. Why are you better than other sponsors and what advantage do you bring to the table? I am sorry but your willingness to travel to the property and potentially move closer to “keep a closer eye” is not the competitive edge that will secure LP interest.

 Setting aside the cash flow component if you were to rent this home, it's also important to take into consideration the transactional costs. When owning a primary residence expect to incur between 10%-12% of the home value in transactional costs between the purchase and sale. Since most of the transactional costs are associated with the sale these cumulative transactional costs of owning a home are rarely taking into consideration in the decision making process when purchasing a home. I believe many would benefit financially from renting until they are prepared to purchase a home intended for a longer hold period as opposed to falling into the trap of becoming a step up buyer or purchasing a home due societal pressures which only really works effectively if you are able to take advantage of appreciation. Here it seems your desire to be a homeowner is potentially clouding your judgement & the better financial decision is to rent for the 4-5 years and invest the down payment money elsewhere unless a better acquisition scenario presents itself.

I am not going to get into the HCVP program. There are certainly pros and cons but I feel this has been discussed at length in these forums. Here’s my thoughts:

Structure is more than just ownership percentages. You mention there is a 70/30 split but also mention the operator partner will be responsible for management and construction. What type of fees are charged? Is there an acquisition fee? What are the construction and maintenance fees? Is there a management fee? Is there a disposition fee? You have to look at the entire picture, not just the ownership percentages because fees can eat into any margin that may exist.

This segways into my next point which is to be weary of these low and moderate income single family syndications and JV opportunities. It's a great narrative and a lot of money has been raised to advance this investment thesis. Nobody is going to question the need for more low and moderate income housing but I've reviewed a number of these single family portfolio opportunities and I find them to be nothing more than an opportunity for the sponsor or operator to collect robust fees without a viable exit strategy for the equity partners.

Here is a quick summary of how these opportunities tend to play out for the equity partner: The equity partners money is invested in homes in low barrier of entry markets which means high transaction volume (plenty of opportunities to collect the same fees I pointed out in my first point). Once “stabilized” these homes are often propped up on appraisals that rarely match reality. Single family portfolios, particularly in these markets are generally very inefficient and the cash flow is eaten up by management and maintenance fees. The equity partners see the equity in the appraisal reports and believe this will be their ultimate exit but fail to appreciate there’s limited opportunities to actually sell these homes to owner occupants given the locations where these homes were purchased and in the rare instances where it happens, the buyers are reliant on 5-6% seller assist and turn over costly inspection repair lists. These transaction costs kill the margins and you realize the death by a thousand paper cut disposition approach isn’t worth the effort and ultimately sell as a package to another investor discounted and you never see the equity translate to an actual gain. Meanwhile the sponsor/ operator has already collected their fees.

Of course there are instances where the underlying thesis is to purchase in locations which transition away from being a low/moderate income neighborhood but that’s not what I typically see. If you are going to buy into this investment thesis, do it on your own and hire a 3rd party GC and property management company.

If you are going to participate in a syndication or enter a JV as the equity, partner with a someone with a skillset that can bring to the table unique deal flow that you are unable to source on your own. Low and moderate income single family homes leased to HCVP voucher recipients doesn't check that box.

I frequently encounter investors and contractors involved in performance, payment or insurance disputes. In most instances, these disputes were avoidable or at the very least could have been resolved far more efficiently if a contract management system was in place. I repeatedly find very little emphasis is placed on contracts, especially in the real estate industry which is incredibly reliant on independent contractor and 3rd party vendor relationships. I personally believe contract literacy is the root issue. Despite the importance contracts, very few understand them.

I am preparing a seminar that will cover contract clauses you should expect to see or include in contracts you sign or prepare along with how to implement a consistent review process. I frequently see posts on bigger pockets and discussion elsewhere on entity formation and liability prevention strategies which leads me to believe there is collective value placed on risk mitigation. Surprisingly, contract management, if used effectively can be a powerful tool yet is largely ignored. Aside from liability prevention, studies indicate small businesses experience 8.6% in revenue loss as a direct result of inadequate contract management. I am curious to hear if my thoughts are on point and if there’s particular subjects or experiences members of this community have encountered that would be helpful if covered.

Highly recommend retaining legal counsel to draft a partnership agreement that meets your particular needs. There are a lot of considerations, some of which are particularly important if family members are involved. 

You will want to obtain a builders risk policy as well as a general liability policy. The general liability could be blanket over multiple properties. Request the mortgagee clause from the lender and this will be added to the insurance certificate. This is to protect the lender in the event of a major loss.

Start with clearly defining your investment thesis and from there narrow in on neighborhoods or markets that properly align. What may be a good thesis for one investor may not necessarily be the most appropriate investment thesis for another.  Once this is well defined, you will be in a better position to concentrate your deal sourcing efforts. Network and get involved in the markets your investment thesis points you towards. You will also find focusing your acquisition parameters will allow you to become more decisive and efficient in your underwriting and decision making. This should lead to a better conversion rate as well.

Happy to hear others recommending Mount Airy. Very high on both Mount Airy and Germantown. These neighborhoods possess characteristics which are highly desired by today's buyers as well as tenants. These neighborhoods also possess some of the more restrictive zoning in Philadelphia which will force supply to remain low relative to other neighborhoods with more permissive zoning. Values will benefit. Very interested in connecting with others who are investing in these neighborhood. Over the course of the past year we've assembled a development pipeline in excess of $25M in the neighborhood and would love to connect with others who are active in the neighborhood.

This seems to be overkill. Ultimately, if there is a legal dispute whether or not there is merit to the claim, the plaintiff's counsel will bring in whomever they feel warrants being named a defendant. The deed holder will be on the top of the list. Having an LLC that owns one property and a separate LLC that handles the PM and Tenant activities is the clearest case of an alter ego and will be quite easy for a plaintiffs attorney to break through to the deed holder entity which seems to be your objective. The best advice I can offer is to keep your rental license active, sign contracts each and every time you engage a vendor/independent contractor, make sure you have appropriate levels of insurance, and make sure any vendors/independent contractors you engage is properly insured and list you as additional insured. Perform these steps consistently and you will avoid far more liability than creating shell LLC's (and save money on unnecessary tax preparation services).

You should first determine what is most important to you (tax treatment, hold period, cash flow etc.), as this is a personal preference and may differ depending on the individual. This allows you to narrow down on the syndications that are aligned with your objectives. From there you can vet those that are within the suitable parameters. I see many spend time vetting deals without any real direction. Once you narrow in on the syndications that are properly aligned you can vet the particular syndications. This means both the deal and the sponsor. For the sponsor you should be looking at the sponsors track record, are they investing in the deal personally or are they relying on a co-gp to fund their equity portion? (this can be a red flag, especially if the equity amount is small) also are they personally serving as the guarantor or are they paying a fee for someone else to serve in this capacity? It's important to understand the role the sponsor is playing. As for the deal itself, this means reviewing entitlements, banks financing approvals, the operating agreement etc.   There's a lot that goes into vetting a syndication and it's important to be thorough with your review. Furthermore a syndication that may be a good fit for one many not be a good fit for someone else.